Monday, November 21, 2005

What's the value of arbitrageurs, speculators, and hedgers?

Anonymous Says:
July 3rd, 2005 at 7:03 pm
There are several well known answers to the question of market speculation’s societal value.

1) Speculators assume financial risks in exchange for future returns (hopefully). Those risks don’t come out of the blue; they come from the balance books of people who do not want or can not afford them. By taking over those risks, speculators perform a service.

2) The presence of speculators in the market makes ir more liquid, improving its ability to accomodate long term investors and commercial operators when they need to perform market operations in the course of their respectable business.

3) Closely related to point 2: speculators improve the market’s ability to function as a price discovery mechanism, i.e. a way to determine the current value of an asset you hold. If you are a commercial company or long term investor, you feel a lot happier knowing not only that there are many buyers and sellers of the stuff on your books, but also knowing at what price they are willing to trade right now, not a week or a month ago.

So yes, unlike string theorists (just to pick a random example) speculators perform very useful services for the economy and therefore for society as a whole.

Andreas Says:
July 3rd, 2005 at 8:29 pm
Of course, there are societal benefits to expect from speculators if society itself is perceived as a market. While many intelligent and respectable individuals indeed see society as a great market place, such a perception is a bizarre delusion of human reality. Unfortunately, this distorted vision leads global society into crisis.


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